Withdrawal from the EU would result in a “protracted period of heightened uncertainty” for the UK, with a likely hit to output and “sizeable” long-term losses in income, the International Monetary Fund has warned.
Global market reaction to a Leave vote in the June 23 referendum is likely to be “negative and could be severe”, warned the global finance body in a regular report on the UK’s economic prospects.
Experts expect that increased barriers to economic activity resulting from Brexit would hit trade, investment and productivity, reducing GDP by between 1.5% and 9.5% – with any loss greater than 1% more than offsetting any gain from the elimination of the UK’s EU budget contributions, said the report.
The IMF warned that the prospect of the referendum “already appears to be having an impact on investment and hiring decisions, with recent surveys of economic activity falling to their weakest levels in three years”.
It added: “A vote for exit would precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output.”
Negotiation of a new trade relationship with Europe could “remain unresolved for years, weighing heavily on investment and economic sentiment” and volatility in financial markets “would likely rise as markets adjust to new circumstances”.
London’s status as a global financial centre could also be “eroded”, as UK-based firms may lose their “passporting” rights to provide financial services to the rest of the EU and much euro-denominated business may over time move to the continent, warned the IMF.
It said that the markets may not wait to see how the impact of Brexit plays out over time, but immediately “price in” the possibility of negative consequences, provoking “an abrupt reaction to an exit vote that effectively brings these costs forward”.
The report warned: “This could entail sharp drops in equity and house prices, increased borrowing costs for households and businesses, and even a sudden stop of investment inflows in to key sectors such as commercial real estate and finance.
“The UK’s record-high current account deficit and attendant reliance on external financing exacerbates these risks. Such market reactions could sharply contract economic activity, further depressing asset prices in a self-reinforcing cycle.
“Any limited support for net exports caused by an abrupt sterling depreciation would only partly offset the hit to GDP from reduced consumption and investment, and inflation could also rise well above target for some time.”
Contagion effects from Brexit could spill over to regional and global markets, but the main impact would be felt domestically in the UK, said the IMF.
While there is “wide uncertainty” over how the markets would react to a Leave vote, it is expected to be “negative and could be severe”.
